Real Estate Agent Taxes: Your Guide to Taxes

As the saying goes, there are two things in life that are certain - death and taxes. In the meantime though, the benefit of being a real estate agent is that you get to have a flexible schedule and make a good amount of money -- but be careful when it comes to paying your taxes, since it’s very different than a typical employee of a company.

First things first, after getting your license, you will interview and pick a brokerage that’s right for you. It’s very important to make sure that you’re at the right office that best fits your needs! Once you are licensed and working at a brokerage, the IRS will now classify you as an independent contractor -- meaning, you’re no longer an employee of a company and you are responsible for your own tax payments.

As we have covered in our blog, How does a real estate agent get paid?, this is a commission-only position and thus you are not going to be receiving a typical hourly or salary wage. However, the upside to this is that -- when you sell a home, the commission checks are usually very generous!

However, a KEY piece of information to remember is that when the broker hands you your check, no taxes have been taken out yet. This is a complete departure from a paycheck you’d receive as a salaried employee, where the deductions are already done and you get a tax refund at the end of the year. In fact, if you don’t set aside the right amount of each commission check for taxes, you will owe the government a heavy amount in April! The other thing is, since your brokerage is not going to do it for you, you are the one that must keep track of your income, expenses, and actual tax filing.

The best thing to do, especially as a real estate agent, is to have a certified tax professional (especially one who’s got experience with other real estate agent-clients) look over your income and see what deductions you can make. After all, as an independent contractor, you essentially are your own business, and therefore can deduct some expenses as business expenses. A great way to find a tax professional like this is to network with experienced agents and ask them who they use to do their taxes.

When you and the professional are doing your taxes, there are many things that count as legitimate business expenses that you can (and should!) deduct to reduce your tax burden. For example, the miles on your car showing houses to clients can be written off. So can expenses for advertising, some office expenses, and further out-of-pocket costs you’ve incurred over the past year.

For far too many agents, the saying applies - “money in hand is money spent.” Don’t be one of those agents -- they are the ones with back taxes that owe money to their brokerages. Since you are given so much freedom as a real estate agent, part of the tradeoff is that you have to be diligent about setting aside money for taxes so that you are not in debt later.

So, what are the takeaways from real estate agents’ taxes?

1. You are not an employee any longer.
2. You will receive checks that do not have taxes taken out.
3. You must set aside some money from each commission check to pay taxes at the end of the year. (Don’t spend money that isn’t yours free and clear -- it’s way too easy to fall into that trap.)

Thanks for reading our weekly blog! We’ll see you back here next week, and if you have any questions or comments, you know what to do...

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